Tax swap

Cut business taxes?

Reducing and simplifying business taxes would have a number of positive impacts, including:

Improving the perceptions of our state’s business climate and our commitment to maintaining our competitiveness

Reducing regressivity

This would enable the state to level the playing field for all businesses, by cutting back on subsidies and tax exemptions.

Lowering the corporate income tax

Lowering or even eliminating the state’s corporate income tax could make the tax system fairer, unless the burden were shifted to the even more regressive sales or property taxes. Making this change would be a welcome development for corporations, cutting their tax bill by about 10 percent. And eliminating the corporate income tax entirely would certainly create some attention – making Minnesota one of only a few states without one.

Broaden sales tax

The sales tax is another potential area for reform. For example, the sales tax on business inputs largely ends up getting passed along to consumers. The state could eliminate this sales tax, potentially reducing complexity and the effect of taxes built into product prices. To keep this change at least revenue-neutral, reduce the overall sales tax rate and broaden the sales tax to more goods and to services, which are the faster-growing part of the economy. Moving to a broader base may also lessen the negative revenue impacts of tax-free internet sales.

Overall, these changes in corporate and consumer sales taxes could be kept revenue-neutral, or, with an accompanying increase in the personal income tax, could provide more revenue — especially as more revenue is captured from growth in services.

Personal income tax

Growth & Justice has long advocated for bringing proportionality to the state tax system with an increase in the income tax on the very highest earners, where income growth has been the fastest.

About a penny increase per dollar of income, on average, would restore the price of government to the level it was at during the prosperous decade of the 1990s. Most taxpayers would pay less than a penny per dollar - or see no increase at all. Those at the top would pay about two cents more per dollar, bringing proportionality to the tax system.

This could restore about $2 billion annually in state revenue, and it would narrow the tax incidence gap between the highest earners and lower- and middle-income households.

Impact on small businesses

We hear a lot of concern about whether an increase in personal income taxes would represent a tax on small business owners whose business income is taxed at personal income tax rates.

First, the impact is probably being overstated. Only a small percentage of small business owners earn very high incomes. Most small businesses are indeed small, and Minnesota tax data reflects this, with less than 3% of the tax filers who earn more than $400,000 reporting any small business income. It’s unclear how much of the total income reported actually comes from actively operating a business — nearly 60% of filers earning more than $100,000 reported salary as well as small business income.

Second, nearly three quarters of small businesses in Minnesota — those employing fewer than 500 people — do not have employees. If the state is interested in tax policy that encourages job creation and economic growth, it should look more deeply at where sustained job growth really occurs, both in terms of company size and form of corporate organization.